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Good Faith in Indian Legal Framework

Our daily lives are woven with contracts- sometimes these contracts are with our express knowledge and consent, and sometimes we enter implicit social contracts with family and friends. These agreements serve as maps, outlining the rights and responsibilities of each party. While establishing clear boundaries, they also leave room for individual interpretation and execution.

This flexibility empowers us by giving us the freedom to approach the task effectively, but it also creates a potential vulnerability if exploited for personal gain. Sometimes, the parties may not be able to foresee every possibility. In these unforeseen moments, expecting ethical behaviour becomes imperative. This is where the implied duty of good faith steps in, filling the gap where the contract falls silent.

According to Black's Law Dictionary (8th Edition), Good Faith means:
  • Honesty in belief or purpose,
  • Faithfulness to one's duty or obligation,
  • Observance of reasonable commercial standards of fair dealings in a given trade or business, or
  • Absence of intent to defraud or to seek unconscionable advantage.
Thus, the above definition stresses honesty and clear consciousness. Good Faith across Legal Dimensions:
We can find the definition of 'Good Faith' in Section 3(22) of the General Clauses Act, 1897 - "A thing shall be deemed to be done in good faith where it is in fact done honestly, whether it is done negligently or not."

We can also find the definition of 'Good Faith' in Section 52 of the Indian Penal Code, 1860 - "A thing is said to be done or believed in good faith when it is done or believed honestly and with due care and attention."

The definition of the term in the General Clauses Act lays stress on honesty only irrespective of negligence but the Indian Penal Code lays stress on honesty of intention along with due care and attention. Both definitions retain the real essence of good faith, which is honesty. This is a feature common to both definitions.

Though codified in acts such as the General Clauses Act and the Indian Penal Code, the doctrine of Good Faith has seen its interpretation evolve, its understanding continuously adapting through diverse interpretations.

In Kailas Sizing Works V, Municipality of Bhivandi and Nizampur, AIR 1969 Bom 127[i], the court observed that "Good Faith" implies upright mental attitude and clear conscience. It contemplates an honest effort to ascertain the facts upon which the exercise of the power must rest. It is an honest determination from ascertained facts. Good faith precludes pretence, deceit or lack of fairness and uprightness and also precludes wanton or wilful negligence. We must therefore see by application of these principles whether the defendants acted honestly."

The term 'Good Faith' has not been expressly defined anywhere in the Indian Contract Act, 1872, except that the term has been used in some provisions of the Indian Contract Act, 1872.

Let's discuss two such provisions:
Section 223: "Where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it causes an injury to the rights of third persons."

Section 178 A: "When the pawnor has obtained possession of the goods pledged by him under a contract voidable under section 19 or section 19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor's defect of title."

Even though the above two provisions use the term 'Good Faith', The Indian Contract Act does not define 'Good Faith'.

In Association of Unified Telecom Service Providers of India vs UOI & Ors, the Delhi High Court held that "Every contract contains an implied covenant of good faith and fair dealing, obligating the contracting parties to refrain from doing anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract."

Thus, the court's ruling highlights that 'Good Faith' applies to every contract and serves to protect the rights and interests of the parties involved. It ensures that parties act honestly and fairly and in a manner that upholds the basic principles of justice and equity in contractual relationships.

Further, it is essential to understand the essence of the contract and the intention of the parties to understand the scope of the good faith in the contract. In Smt. Swarnam Ramachandran & Another vs Aravacode Chakungal Jayapalan[ii], the court explored the interpretation of the parties' intention in a contract. The court held that the intention of the parties can be ascertained from:
  • Express words used in the contract,
  • The nature of the property, which forms the subject matter of the contract,
  • The nature of the contract, and
  • The surrounding circumstances.
In addition to its application in contract law, the principle of good faith holds significant relevance within insurance law. In insurance contracts, both parties are bound by the doctrine of utmost good faith, also known as "uberrimae fidei". The rationale behind this doctrine is rooted in ensuring fairness and transparency in insurance arrangements.

The principle of good faith extends beyond insurance law and permeates various other legal domains, including property law, employment law, family law, and beyond. Its overarching purpose is to foster trust and fairness in legal relationships, emphasizing the importance of honesty and transparency in all dealings between parties.

The Indian Penal Code and The General Clauses Act recognize the term 'Good Faith', but the term finds limited mention in the Indian Contract Act, 1872. The judiciary has consistently interpreted 'Good Faith' in contractual relationships, emphasizing the importance of integrity and honesty among parties. However, the absence of any concrete guideline for the term 'Good Faith' makes it somewhat ambiguous.

Notably, there is no statutory obligation in Indian law to adhere to good faith during contract negotiation or formation, and the mere mention of it in certain provisions does not make it mandatory. In contrast, jurisdictions like the USA highlight the indispensable nature of a duty of good faith to protect parties from potential harm.

Similarly, in England, the judiciary has a growing inclination to incorporate the concept of good faith into its legal framework. In India, while the judiciary may establish the doctrine in specific cases to uphold contractual morality, its widespread adoption remains subject to further legal developments and judicial interpretation.

  1. AIR1969BOM127, (1968)70BOMLR554, ILR1969BOM564, AIR 1969 BOMBAY 127, ILR (1969) BOM 564, 1968 MAH LJ 916, 70 BOM LR 554
  2. AIRONLINE 2004 SC 907

Written By: CS Mohua Singh

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